Pensions crisis? What pensions crisis?

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Is Europe truly facing a pension crisis? That may very well depend on how you look at the problem, says Jeremy Woolfe.

Gloom ahead for the pensioner? Mass poverty for the aged in years to come? May be! But a graphic shown at a recent conference in Brussels - 'Europe's Pension Crisis, Finding a Solution' - can be interpreted as optimistic. In fact, a possible reading indicates an entirely rosy future. It could point to seeing the old-age dependency ratio experienced today remaining more or less unchanged for decades to come.

However, all this depends on what parameters one applies to the scenario decades ahead. The graphic came in a presentation by Ralf Jacob, head of unit for pensions, healthcare and social services in the European Commission's Directorate-General for Employment, Social Affairs and Inclusion. Modified slightly from a figure in the Commission's policy paper of last July, the slide implies the possibility of a stable dependency ratio from 2010 to 2060. A bold arrow, on the time scale from left to right, which is exactly horizontal, represents this scenario.

Such a forecast depends on various assumptions. Some could be unrealistic. These include that, in 2010, people leave the labour market on average at age 60. Sadly, this is by no means the case. But, if it were, the dependency ratio, for retirees above age 60, is described in the Green Paper as amounting to five at work to every two pensioners. If, by 2040, people were to remain in work until 67, the corresponding ratio would stay constant.

According to the paper - in its version of the bar chart 'Preventing the long-term adequacy-sustainability crisis: higher effective retirement age' - any increase in dependency ratio by 2060 would be far less dramatic than at lower exit ages. There would be no increase if the exit from work age were to increase another three years between 2040 and 2060.

In other words, if various assumptions were adopted, forecasts of mass poverty in old age are too gloomy. Unsurprisingly, general assumptions have to include that retirement age remains in-line with longevity, that longevity continues to increase and that active health continues to increase in-line with longevity.

Jacob comments that the graphic assumes the Commission's increase in life expectancy between now and 2060 is six years. However, this estimate can be compared with another graph presented at the same Brussels conference. Swiss Re's Alison McKie, head of life and health products, showed a slide illustrating that longevity increases are universally underestimated. To the point, the slide also shows that between 1966 and 2006 - a 40-year period - life expectancy rose by about 0.275 years (3.3 months) per year.

If one dare extrapolate this fairly linear increase in longevity at the same rate, to 2060, today's age of 60 would be equivalent to around 73, then, making that a feasible exit-from-work age, at least for some. The conjecture would be in the face of all sorts of unknowns, including medical advances.

According to EurActif, a website that monitors EU matters, the European Commission is working to convince member states to adopt 'automatic adjustments' in their pensions legislation so retirement ages are pegged to longevity. This report, which could be inferred as some kind of threat to national governments, should be no surprise. It is consistent with the Commission's continuous position. What national governments make of it is another matter.